Rethinking Social Insurance

About the Authors

The single greatest threat to the fiscal health of the United
States is the runaway growth of the nation's major retirement and
health care entitlement programs. Social Security and Medicare are
projected to grow from 7.5 percent of GDP today to almost 13
percent of GDP by 2030. Already, the two programs consume over a
third of the federal budget. The total present value costs of
Social Security and Medicare over the next 75 years exceeds $41
trillion, or, as the Government Accountability Office points out, a
debt burden of $135,000 for every man, woman, and child in America.
If nothing is done to check the growth of spending on social
insurance, federal spending as a share of the economy will increase
by half, from about 20 percent to almost 30 percent, over the next
30 years.

Meanwhile, absent a significant rise in revenue beyond the
historical level of GDP, spending on Social Security, Medicare, and
interest on the debt could squeeze out all other areas of the
budget. Taxes could, in principle, be increased to cover these
costs, but the unprecedented tax levels required would have an
extremely negative impact on employment, wage growth, and our
ability to compete internationally. Borrowing to pay for the
programs, on the other hand, would lead to such high deficits that
the debt would be unsustainable.

Social Security and Medicare are universal in design. That is,
nearly all Americans participate in the programs, with workers
financing them and retirees at all income levels collecting
benefits. Their universality enhances their popularity, but it also
means that resources are directed to the affluent, leaving less
than is adequate for those in need. Bill Gates will qualify for
subsidized benefits under Medicare, while other future retirees
will be unable to afford the program's deductibles and co-payments.
Meanwhile, tens of millions of workers today go without any health
insurance at all.

Given the fiscal imbalances caused by Social Security and
Medicare, we will have to make some major changes in our social
insurance system if we are to address other pressing needs.
Mandating giant tax increases or gutting spending in other areas
are not viable options. Moreover, our economy has undergone vast
changes since these programs were designed. A fundamental redesign
of our social insurance programs is necessary if we are to deal
successfully and fairly with the new economic conditions, risks,
and opportunities we face.

Entitlements as a Moral Right: Why
Change Is Difficult

The fact that Social Security and Medicare are entitlement
programs means that they are extremely difficult to change. A major
reason for that is that, to many Americans, the term "entitlement"
implies something to which they have a moral right. When they think
of Social Security and Medicare in particular, this claim is
strengthened by the belief that they have paid for their benefits
through payroll taxes. Those drawing benefits view them as earned
payments and services rather than as subsidies or welfare.

Moreover, the system includes all income classes as
beneficiaries, and this universality links all citizens in a bond
of social solidarity--a social contract between themselves and the
wider community. And the direct benefits that individuals receive
under Social Security and Medicare in the form of cash payments and
medical care mean that these programs--unlike those that provide
nonrival, nondivisible "public goods"--have large numbers of
influential and vocal supporters.

Finally, the treatment of entitlements under the budgetary
process favors them over all other programs. While other programs
are budgeted for annually and are constrained by that budget;
entitlements are effectively on "auto pilot" and are treated as
first claimant on government resources, leaving programs intended
to further other goals, such as national security or housing, to
compete for what is left. The automatic growth that is built into
these programs stacks the deck against other budgetary needs and
has been steadily squeezing them.

Social Insurance: Perception vs.
Reality

While Social Security and Medicare beneficiaries may believe
that they have a "right" to their promised benefits, legally they
do not. Benefits can be changed--and they regularly are, though
often upwards in the case of middle-class benefits. Moreover, it is
neither possible nor desirable politically for Congress to commit
future governments to specific programs without affording them the
flexibility to make changes as needed over time.

Also contrary to popular perceptions, the link between
"contributions" and benefits is tenuous at best. The taxes paid
into these programs are commingled with all other government
revenues and are regularly used to finance other programs, just as
general revenues are used in part to pay for social insurance
programs. There are also many hidden subsidies within the programs.
Many individual beneficiaries now receive huge windfalls that
amount to hundreds of thousands of dollars more than they paid in,
but future generations will not fare nearly so well. There is also
a significant amount of redistribution, with many recipients
receiving large subsidies. Quite often, those subsidies go from the
poor to the rich rather than the reverse.

Due to the growth and popularity of these programs, we have seen
a gradual and persistent decline in the proportion of federal
funding for basic research, infrastructure development, and
programs for the poor. This should trouble those who believe that
the role of government should be limited to the provision of public
goods, public investments, and a safety net as well as those who
favor progressive, redistributive government programs. Put plainly,
the cost of providing benefits to those who do not need them should
offend conservatives and liberals alike, the former because it
leads to excess and inappropriate spending and the latter because
it squeezes out spending on other social programs.While the tension
between liberals and conservatives over spending and taxes will
always persist, the underpinnings of a broad coalition in favor of
changing our social insurance system may exist in the recognition
that universality works against the beliefs of both sides and our
goals as a nation.

Changing the Emphasis from "Social" to
"Insurance"

If we are to meet the economic challenges presented by the aging
of the population, skyrocketing health care costs, and a globalized
economy, we would be wise to scale back benefits given to those who
don't need them in order to help those who do while leaving some
flexibility in the budget for new needs that arise.

Accordingly, we recommend changing the emphasis in social
insurance from "social" to "insurance." The result would be a
system in which the government spreads risk and protects people
against unexpected and potentially devastating occurrences rather
than providing subsidized retirement income and health services to
everyone, regardless of need.

We need to modernize our system of social insurance to require
individuals to take greater responsibility for their basic health
care costs and save for retirement rather than relying so heavily
on the wider community via the government. But to do this we need
to offer protections against random, unaffordable, and potentially
catastrophic events. Americans have come to expect a certain level
of health care and income in retirement as a right without giving
much thought to how we as a society are to pay for those benefits
and who is to foot the bill. However, we can no longer afford such
attitudes. We believe that it is legitimate to encourage--indeed,
to require--members of our society, to the extent that they are
able, to save for adequate retirement and insure themselves for the
cost of basic health care. At the same time, we will need a true
and adequate safety net to protect against serious risks. And to do
this fairly and economically, we need to put social insurance
programs on the same budgetary footing as other government programs
so as to increase transparency and achieve balance in financing our
national goals.

How a Modern System of Social
Insurance Would Work

We recommend that Americans, to the extent that they can
reasonably be expected to do so, be obligated to save for an
adequate level of retirement and insure themselves against ordinary
risks, with three caveats. First, if needed, individuals should
receive help in meeting the costs of such an obligation through tax
relief and/or direct financial assistance. Second, government
should help to spread large insurance risks widely so that
insurance would be practical and affordable. Finally, existing
social insurance programs should be revamped to provide a strong
safety net.

Replacing Part of
Social Insurance with Mandatory Saving

Under the proposed system, individuals would be required to save
for a reasonable level of predictable events, many of which are now
covered by some form of social insurance. Most Americans are
regular consumers of basic health care throughout their lives, and
most retire at the end of their working careers. Insuring against
these events is, to put it simply, like buying insurance for the
routine cleaning of the gutters on your house: Either your premium
will end up costing as much as or more than the cleaning due to
administrative costs, or others will have to subsidize your costs.
While it makes sense to buy insurance against the risk that your
house might burn down, because others will also want such insurance
and the risk can be spread communally, it makes no sense to pay a
high premium for the cleaning of your gutters.

Accordingly, when it comes to events that we know are likely to
occur, such as spending on routine and affordable health care,
individuals who could reasonably afford to do so should be required
to set aside resources to cover these costs as they arise. A
mandatory saving system in place of at least part of today's social
insurance system has numerous advantages. First, it would increase
transparency regarding costs, thereby removing the "moral hazard"
problem that arises when individuals overuse insurance because they
are not responsible for the true costs of the services they seek.
This general problem is compounded by the tendency of the political
process to expand politically popular programs, collectivizing
costs that could be handled far more efficiently and appropriately
by those individuals with adequate means and systematically
transferring costs from powerful demographic constituencies (e.g.,
middle-class and middle-aged adults) to weaker ones (e.g., the
young). A mandatory saving system would also relieve some of the
pressure on the federal budget to provide costly goods to the
affluent. And it would be beneficial for the economy, both because
individual saving is more efficient than taxation and because it
would lead to a much-needed increase in national saving to spur
economic growth.

There has been keen interest in recent years in voluntary
accounts for Social Security, health care saving accounts, and
other forms of pension-like saving systems. Proponents have argued
that such accounts, which would replace a portion of the existing
social insurance system, would make that system more efficient and
fairer. Opponents have seen such plans as a backdoor attack on the
concept of universality by allowing people to opt out of the
system. By making saving mandatory, we would reaffirm our
commitment to universality of coverage as well as personal
responsibility while updating the system to reflect current
economic and budgetary conditions.

The new health care and retirement savings accounts would grow
only slowly for people at the low end of the income spectrum, and
many such individuals would not be able save enough to cover basic
health care and retirement costs. In order to address this problem,
our society through the government should provide some assistance.
One way might be through progressive matches. Those falling below
the poverty line might receive 2-to-1 matches for their
contributions; those with incomes between 100 percent and 200
percent of the poverty line might receive 1-to-1 matches; and those
with incomes up to 300 percent of the poverty line might have half
of their contribution matched by the federal government. Another
form of assistance for some modest-income Americans could be
through the tax system.

In addition to augmenting the accounts of lower-income workers,
the government would play a role in regulating the accounts. Take
retirement accounts for example. In the absence of regulation,
individuals might overspend in the early years of retirement and
outlive their savings, making them unnecessarily dependent on the
government safety net. Therefore, it would be wise to place
restrictions on the structure and use of such savings accounts, at
least until the balance was sufficient for basic retirement needs.
It would also be wise to require that some portion of such accounts
be converted into a basic annuity upon retirement so that retirees
could be assured of a steady monthly income however long they
lived.

Replacing Part of
Social Insurance by Requiring Real Insurance

While saving for predictable events is a good idea, it is not an
effective way to spread financial risk. Therefore, in addition to
requiring individuals of working age to save for their own health
care and retirement to the extent that they are able to do so, we
should also require individuals to carry reasonable levels of
insurance against unpredictable, more traumatic events that
otherwise would have to be paid for by government or society.

Many Americans buy life insurance to protect a surviving spouse
against the death of the family's breadwinner, long-term care
insurance to protect against the costs of a prolonged period of
illness that might drain a family's resources, and disability
insurance to protect against loss of income due to the inability to
work. But many Americans with the means to pay for such insurance
decide instead to rely on overstretched social insurance programs,
adding to the underfunded obligations of these programs. If we are
to get the costs of those programs under control and do so fairly,
those who can afford to insure themselves against such
eventualities should be required to do so.

At the same time, the government will have an important role to
play in making sure that insurance is affordable and available to
everyone. If, for example, individuals with chronic medical
conditions are to be able to buy coverage, the insurance risk may
have to be spread very widely and premiums cross-subsidized through
reinsurance and risk-adjustment mechanisms. To a large extent, this
can be accomplished within the normal insurance process. But to be
sure this happens, government may have to require all insurers to
take part in a reinsurance pool with a system of cross-subsidies
and direct premium subsidies for some individuals. Those who could
not afford to insure themselves would participate in the same
insurance programs with subsidies from the government to help cover
some or all of the insurance premiums.

Reforming
Entitlements to Provide a Strong Safety Net

If we continue on our current path, entitlement programs will
absorb a steadily increasing share of the budget, hobbling our
ability to meet other pressing needs and placing huge burdens on
our children and grandchildren. There is no solution to this
problem except to make significant reductions in the growth of
promised benefits of both Social Security and Medicare. And here we
have two choices. We can reduce the growth of expected benefits for
everybody, or we can trim them more for people who rely on the
programs less. We believe that it is preferable to reduce benefits
through means testing for those who do not need them in order to
ensure the economic security of those who do.

There is certain to be resistance to means testing on the part
of those who believe that universality is essential for maintaining
popular support for social insurance programs. However, it is
important to recognize that while universal benefits may engender
social solidarity, they are also obstacles to the progressive and
conservative goal of assuring that available funds go primarily to
those in need. Rather than being seen as breaking the web of mutual
obligations that bind us together as a community, means testing
should be seen as enabling us to strengthen the safety net so that
no one falls through.

It would not only allow us to focus our limited resources on
those who need help the most, but also allow us to begin to
transform Medicare and Social Security into true retirement
insurance programs to protect Americans against health care and
retirement costs that exceed their means. In short, by calibrating
the resources provided to the elderly to their actual needs, we
would have greater resources with which to meet our societal
obligations to our children, to modernize our infrastructure, and
to maintain our national security.

There are many ways to structure a means test for government
retirement benefits so long as we adhere to the basic principle
that benefits should be tied to need rather than to a preset
formula with scant regard to need. Either postretirement income or
lifetime income could be used to determine an individual's
eligibility. And the benefit itself could be designed in any number
of ways. For instance, income replacement rates in Social Security
might be reduced for high-income earners (who would still receive
higher benefits than lower earners); or all participants might
receive a uniform flat-rate benefit; or high-income earners might
receive little or no benefit at all. Medicare premiums and
co-payments could be adjusted to reflect the ability to pay. We
would recommend determining eligibility based on lifetime earnings
in order to avoid the perverse incentives on saving that accompany
simple means testing (though this would be less of a problem under
a mandatory saving system) and providing the highest income
retirees with no benefits at all in order to preserve and redirect
scarce resources.

Changing the
Budgetary Nature of Entitlements

If we are to change the nature of the social contract so as to
promote fairness and efficiency while balancing competing social
and economic goals, we will have to change the legislative rules
governing the way federal funds are allocated. Currently, social
insurance entitlement programs guarantee promises made to one set
of Americans by automatically preempting budgetary resources from
programs serving other Americans. Moreover, the solvency of our
nation is jeopardized because of the natural tendency of
politicians to create or expand popular entitlements whose
long-term costs are not fully reflected in the budget. We need a
budget process that presents the full range of budget choices in a
transparent manner, with everything on the table, so that Congress
can allocate funds according to our values and within the
constraints of our resources.

This will necessitate two broad reforms. First, budget rules
should be changed to require the long-term costs of programs to be
identified and weighed in a meaningful way against other budget
choices in the annual budget process. Under the current system,
lawmakers can ignore those long-term costs and create obligations
that will place huge burdens on our children and grandchildren.
Second, we should modify or end the distinction between
"entitlement" programs like Medicare and Social Security and
"discretionary" programs like defense and housing assistance.

We should create a complete and accurate budget that clearly
shows the government's financial obligations with respect to
entitlements. To bring the true costs of Social Security, Medicare,
and other entitlements into focus and prompt serious priority
setting, the budget process should include a measure of the future
obligations associated with these programs. Thus, in order to
increase transparency, the budget, instead of merely showing
spending projections over the next five or ten years, should also
show the estimated "present value" cost of unfunded obligations
over both a multi-decade period and an infinite horizon, much as
private corporations are required to provide retiree costs to
stockholders and as state and city governments are increasingly
required to disclose the total cost of their pension obligations.
In this way, during each annual budget cycle, lawmakers would be
required to disclose and budget for any projected changes in the
future cost of an entitlement. And to force lawmakers to take
changes to these obligations seriously, any significant change in
the present value of total unfunded obligations should require a
separate up-or-down vote.

In addition to disclosing the obligations associated with
entitlements, we need a real long-term budget for today's
entitlements if we are to get these obligations under control. At
the same time, it is important to recognize that such programs by
their very nature involve extended time horizons and require
planning for the long term. Capital budgets in the private sector
and in parts of the public sector recognize this. Likewise, an
individual planning for retirement requires a degree of certainty
about Social Security or Medicare. Such concerns can be addressed
within the framework of an adjustable long-term budget, one that
would be reassessed periodically by Congress to ensure that our
spending on entitlements is sustainable.

One way to do this would be to convert all spending on
entitlements into 30-year "discretionary" budgeted programs that
would have to be reviewed and reauthorized every five years. This
is essentially what many other countries do to manage their
long-term obligations. To keep the programs within the approved
budget, Congress could create budget rules to limit the unfettered
growth of long-term promises. For instance, it might create
"triggers" that would automatically make adjustments to the
programs if spending were projected to move above budgeted levels.
The eligibility age for receiving Medicare benefits, or payments to
providers, might be subject to such a trigger. Congress could
always make other changes in the programs (by raising taxes or
cutting other spending programs) with the built-in triggers serving
as a backstop for inaction. To avoid the political fallout from
legislating benefit cuts, it might also consider creating a
standing commission to recommend to Congress for expedited review a
package of changes in the programs to bring costs into alignment
with funding.

Questions and Answers

Recognizing that our suggestions for reforming social insurance
will naturally raise some serious concerns, we have attempted to
anticipate and provide answers to some of the questions that are
likely to arise.

If we end the entitlement status of certain programs,
won't we be breaking a solemn promise to the American
people?

The current social insurance entitlement system commits us--and
future generations--to deliver benefits without regard for their
impact on society, on the economy, or on our ability to maintain
our other obligations, such as to provide for the national defense
or to help the needy. Consequently, the promises made in these
other obligations are diluted. Altering the entitlement status of
social insurance programs would not so much break a promise as
replace an unsustainable promise with one that is affordable and
fair, and one that recognizes other priorities and promises
made.

However, we also recognize that today's aging workers are
concerned about the viability of Social Security and Medicare and
need to have some certainty in their planning. That is why we argue
that Congress should develop multi-decade budgets for programs that
are now essentially on automatic pilot. That step would allow us to
address the needs of baby boomers approaching retirement while
moderating our future commitments. With a firm budget in place of a
mere forecast of costs, we would be able to limit our commitment to
provide social insurance relative to our other needs. And the
required regular revisions of that budget would ensure that the
promised benefits were adjusted from time to time in response to
changed economic conditions, changing priorities, and competing
promises.

But we cannot continue to make promises that entail an unlimited
financial obligation to certain sectors of the population without
considering their impact on society as a whole. Other countries
seem to understand this better than we do. In Britain, for
instance, the National Health Service provides health care to all
Britons. But the NHS does not automatically preempt financial
resources as our entitlement programs do. Parliament allocates
funds for the health service in the budget in line with a long-term
funding plan and periodically makes significant changes in the
NHS's spending authority, weighing health care needs against other
priorities and occasionally fine-tuning the funding plan. It is
left to the NHS to determine the best way to achieve the program's
promise with the funds it is given.

Britain made a promise about health care that is clearer and
more comprehensive than we have made in the United States, but a
promise that recognizes competing interests and available
resources. We, on the other hand, have made an open-ended
commitment to provide medical care to retirees while increasing
numbers of other Americans lack basic health care coverage. Our
promise with respect to health care is fragmented and uneven, in
part because Congress does not deal with the cost of open-ended
entitlement commitments.

Will liberals object to our proposal in the belief that
it would cause the social insurance coalition to
collapse?

For decades the assumption among many politicians and analysts
has been that universality is the key to preserving the interests
of the less well-off because it builds solidarity between rich and
poor. Because all income groups benefit from our social insurance
programs, the argument goes, middle-class and even upper-income
Americans fight for them politically. The concern is that although
changing those programs to focus more on lower-income Americans
would help those in need in the short term, it would erode that
solidarity, support for the programs would dwindle, and funds would
be cut.

There are four reasons why this concern is outdated and
misplaced. First, the obligation to help those in need is an
ingrained American value. It is not the result of a coalition of
convenience. In particular, Americans support programs to assure
basic health care for the needy. That is why there is broad and
enduring support for programs like the Earned Income Tax Credit and
Medicaid. There is no need for us to give generous benefits to
people who don't need them in order to "buy" their political
support for programs for those who do.

Second, even well-off working Americans worry that they might
not have enough resources when they retire or if they were to hit
hard times, so there is deep and strong support for a reasonable
and affordable social safety net.

Third, purchasing middle-class support for universal programs
has come at a very heavy price for weaker groups in our society.
Increasingly, the politically powerful, aging middle class has come
to dominate the politics of entitlements. Rather than the social
insurance coalition protecting the interests of the poor and the
young, benefits for the middle-class elderly have risen while those
for younger and more vulnerable groups have been squeezed.

Fourth, even if one does take the view that a broad coalition is
needed to preserve assistance to the less well-off, our approach
meets that test. What we envision is a modified coalition of
supporters. Our proposed reforms would strengthen progressive
support by making a greater commitment to needier individuals. And
although our entitlement reforms would reduce or eliminate the
benefits paid to middle-class and especially upper-income
Americans, the spending control and fiscal improvements resulting
from the reforms would likely win their strong and lasting support
by improving the long-term economic climate and by reducing the
huge unfunded obligations facing their children and grandchildren.
Thus, a broad-based coalition of support would be maintained.

Will conservatives oppose mandated savings and insurance
as the equivalent of taxes?

While conservatives typically oppose government mandates as well
as most taxes, substituting a mandate for an existing tax or
benefit program is a different issue. For example, when
conservatives strongly supported proposals to permit working
Americans to dedicate part of the Social Security payroll tax to
individual retirement accounts in recent reform proposals, they
were also accepting a mandate to make private provision for
retirement. Many conservatives also support a mandate on families
to buy basic health insurance coverage to shield the community from
having the obligation to pay for expensive emergency room care for
the uninsured under the terms of current law. In each case, the
substitution of a mandate in place of the traditional social
insurance program is seen as a step toward a fairer and more
affordable system of financial protection and more choice and
control for families. Mandated saving is also more efficient than
imposing taxes because individuals see a direct link between what
they save and their own assets and future benefits. Furthermore,
while conservatives may still think of mandates as a form of
taxation, they typically see them as more tolerable because
mandates permit choice and are more consistent with personal
responsibility.

Still, conservatives would be wary of "creeping mandates" that
go beyond a substitute for existing taxes. They are likely to worry
that the government might start ratcheting up the size and scope of
mandates on individuals to save or to insure themselves against
certain risks. This is not a meaningless worry because, to
politicians, a mandate is a "free" program in contrast to programs
that must be paid for by raising taxes. A related concern is that
the steadily increasing regulation associated with mandates can
wring out any semblance of personal choice, making the requirement
merely the means of privately financing government-determined
services.

In order to solidify conservative support for a structural
reform of entitlements that combined a retirement insurance safety
net with a mandate, it would be wise to limit the mandate
explicitly to financing alternatives to current programs. An
important question would be whether the level should be what the
existing program can finance (the level most Republicans would opt
for) or what the program has promised (the level Democrats would
likely want to see). That needs to be debated and discussed with
the American people.

Will there be unacceptable risk to
individuals?

Some critics of a restructured social insurance system argue
that limiting entitlements would unfairly increase the financial
risks Americans face, but this overlooks the distribution of
financial risk today, as well as the reasonable protections
included in our proposed reforms.

Under today's system there is actually enormous financial risk,
but it is hidden and unfairly distributed. Middle- and upper-income
beneficiaries of retirement programs enjoy considerable protection
(especially under Medicare) from the potential costs of services
they can actually afford, but many poorer retirees still face
insurmountable costs because they are not adequately protected. And
while current retirees enjoy less financial risk due to social
insurance, the growing unfunded obligations related to these
programs mean that younger Americans and future generations face
huge financial risks related to having to finance huge payments to
preceding generations while their own expected benefits are not
assured yet their ability to save is reduced. Further, the ability
of legislators to make sensible budget decisions is undermined
because the very design of our social insurance programs makes it
politically attractive to continually expand and yet underfund
benefits.

Our proposed reforms seek to contain financial risk and
distribute it more fairly. Under our proposal, middle-income and
affluent Americans would shoulder more of the predictable costs of
aging or sickness because they are better placed to do so. Poorer
Americans would receive government assistance to save for these
life occurrences. All Americans would be insured and protected
against major illness, disability, and the death of the family
breadwinner. And there would be a final layer of universal
protection with an affordable safety net in place. The balance of
risk between generations would also be made more equitable.
Finally, by limiting the scale of social insurance and transforming
it into real insurance with a stronger safety net, the costly
expansion of programs would be curbed, thereby reducing the
financial risk for all taxpayers.

How should retirement health insurance be structured?
Would private insurance lead to risk segmentation?

Proposals to substitute individual insurance for part of an
existing social insurance program invariably raise concerns about
adverse selection in the case of health care. The concern is that
if the collective feature of Medicare is reduced and replaced with
private insurance, healthier people will be able to buy relatively
inexpensive insurance, while sicker individuals will face much
higher costs or be unable to purchase coverage.

This is a legitimate concern that has to be addressed. To be
fair and viable, the reform we propose must maintain a degree of
social solidarity with private coverage that is affordable and
available to all (which will require risk pooling and reinsurance
arrangements to spread the insurance risk). This is also an issue
with respect to all efforts to expand private health insurance
coverage. Fortunately, the states and the federal government are
exploring ways to structure pools and reinsurance systems to
address adverse selection. We envision private insurance reforms of
this nature accompanying the social insurance and budget process
reforms we propose.

How do we get from here to there?

The transition from the current social insurance system to the
future we envision will require the phasing in of the new system
and the phasing out of the old one. The first step will be to
determine precisely what purposes the saving mandate will cover,
how much individuals will have to save for each of these purposes,
and what basic required insurance packages will be included. We
envision requirements to save for retirement and basic health care
spending and to purchase unemployment, disability, catastrophic
health, and long-term care insurance.

At the same time, the government should change its budgetary
rules so that the costs of our long-term commitments are apparent
and can be controlled. Thirty-year budgets and trigger mechanisms
for our current entitlement programs should be put in place
immediately. These budget steps will spur Congress to balance the
long and short terms more openly and sensibly. In so doing, it will
have more incentive and opportunity to plan for the transition
costs required to achieve long-term savings. In addition, new
infrastructure--including automatic-enrollment savings systems in
the workplace, mechanisms to ensure that all have access to
financial institutions, and systems that will allow the federal
government, the states, and the private sector to work together to
devise methods to spread large insurance risks more
effectively--will also have to be put in place.

As quickly as possible, we should phase in a means test for
premiums and benefits for Medicare and Social Security. The sooner
the scaling back of unnecessary benefits is phased in, the less
other programs will have to be cut. We support including current
and near-retirees in this change since these demographic groups
have fared disproportionately well under our social insurance
programs and because the more widely the benefit reductions are
spread, the smaller they will have to be--though the political
process may not allow for such a bold change.

We also support speeding up the increase in, and further
increasing, the retirement age. Under current law, the normal
retirement age is scheduled to rise from 66 to 67 between 2017 and
2022. This increase in the retirement age should be accelerated,
increased further, and indexed to longevity to reflect the growing
life expectancy of the population. This change would generate
savings both by allowing individuals more years to accumulate
personal savings and by allowing for fewer years of collecting
benefits from social insurance programs.

During the transition period, individuals should be required to
begin saving and purchasing the required insurance coverage
immediately to replace part of today's benefits. The level of
required saving would increase gradually as we are able to reduce
the payroll tax due to other reforms in entitlement programs. Then
benefits could be curbed more steeply for younger generations once
their private savings had built up. The "transition generations"
would receive some benefits from the old system to help augment
their private savings at retirement.

Conclusion

Our proposed restructuring of social insurance requires a
complete rethinking of existing programs. As the cost of providing
social insurance for all Americans--whether they need it or
not--becomes prohibitive, our commitment to provide real insurance
for unanticipated or unaffordable events and to help lower-income
individuals must be maintained and strengthened.

Our society can and should be committed to protecting people
from unanticipated events that could prove devastating to their
economic well-being. However, it is too costly, economically
inefficient, and utterly unnecessary to provide benefits that serve
more of a political purpose than an economic or moral one. The
purpose of a just social contract should be to balance security and
personal responsibility. We believe this is best accomplished by
protecting people from unforeseen disruptions in their lives while
encouraging them to prepare themselves for probable eventualities,
including retirement and medical costs late in life.

Under our proposal, Americans would have to take more personal
responsibility for their future, but they could rest easy in the
knowledge that a secure income-related safety net was in place to
protect them against catastrophic occurrences. Americans of every
age group also would have the assurance that their needs and
priorities would be given fair consideration in the budget process.
And while some middle- and upper-income working Americans would
have to accept lower Medicare and Social Security benefits than
they once anticipated, they would have access to affordable private
insurance and personal savings to offset the decreases.

We believe that this approach lends itself to bipartisan support
because it better reflects both progressive and conservative
principles than our current social insurance system does. Our
proposal would result in a more progressive approach to assistance
for the needy, a better balance between expectations and
responsibility on the part of citizens, and a budget process that
truly reflects the nation's priorities and values.

Stuart M. Butler, Ph.D.,
is the Vice President of Domestic and Economic Policy Studies at
The Heritage Foundation and Maya MacGuineas is the Director of the
Fiscal Policy Program at the New America Foundation.

Nothing written here is to be construed as necessarily
reflecting the views of The Heritage Foundation, The New America
Foundation, any institution with which the authors are affiliated,
or as an attempt to aid or hinder the passage of any bill before
Congress.